LONDON (ICIS)--European base oils supply
remains high going into Easter,
especially for Group I and III, with few signs
of change despite rising oil prices which could
prompt refiners to cut back base oils supply.

- Margins pressured by rising upstream
values

- Minimal tightening effect from Group
I, III turnarounds

- Questions over Q2 balance outlook
after maintenances end

Healthy supply from European refiners and
traders remains a key theme across all Group I
grades, despite European and Russian
turnarounds (see chart) resulting in consistent
price decreases in
early 2019.

Rising feedstock prices also figure strongly in
market discussions, with sources arguing that
refiners could potentially reduce output in
favour of producing more diesel.

However, there is no clear indication of this
trend in the market yet.

"At the moment, there is more desperation on
the sellers' side. We get a lot of calls from
suppliers and not so many from buyers. That
clearly points out it's still a buyers market
and a long market," said one European trading
source.

"Producers are not making money now. The margin
has come down seriously. How long they will go
like this? Instead of making base oils, [it
could be] better to sell gasoil or VGO [vacuum
gas oil] ... They have to do something - either
put up prices or cut [production]," said an
international distributor.

Margins are under pressure since falling values
for a lighter grade of base oils, SN150,
have shrunk the spread with VGO for
domestic and export grades to their weakest
point in at least a year in early April,
according to ICIS data.

There are rarer discussions of more balanced
supply or slimmer Russian supply on the back of
maintenance.

The market could potentially come into a more
balanced position if refiners do reduce output.

If US Group II becomes less of a threat in
Africa, this could be a release vale for
material to flow out of Europe and possibly
boost European export prices, or take excess
material out of Europe.

Another factor to watch is the Russian
agricultural season. So far, market players
have said demand has been rather improvable -
it it roars into action and boosts lubricants
demand, this could leave less material in the
Baltics market for export to Europe.

GROUP II WATCHING THE
USIn the Group II market,
healthy supply contributed to prices being
assessed down earlier in April.

In light of recent lifts in posted prices from
several US refiners in April, there may be
calls from the US for higher prices in Europe,
unless there is a reversal in US values).

Market feedback in April has indicated European
unwillingness to bring material over without a
guarantee of better values on the continent.

Having said this, there is a view that
oversupply in the US Group II market may
persuade refiners to send material out of that
region to protect local margins and export
material, and this could maintain export
volumes.

Offers of material from the new
Rotterdam plant are not
widely noted in the market, although some
sources said there had been
some competitive prices, but it is unclear
how common these are.

Product from the new plant is not expected by
many in the sector to affect the market until
later in 2019.

GROUP III LENGTH
PERSISTSEurope’s Group III
prices were unchanged in the week to 16 April,
following recent
falls led by weaker Group I values and high
supply.

Europe’s market has plenty of material, with
offers from local production as well as South
Korea, Malaysia and the Middle East.

"The Group III market is still very long," said
a European base oils source.

Opposing forces of crude and high supply could
cancel each other out and create stability over
the next month, argued a northwest European
distributor.

"I do not see a big move in either direction.
There's too much pressure on crude oil and raw
material side. It can't go much lower or better
shut operations off. On the other side, there's
enough volume around," said the source.

There was minimal impact from planned
maintenances at S-Oil’s Korean and Tatneft’s
Russian plants. The Russian supplier may have
begun to offer material again, which could
refresh that flow of material to Europe.

One balancing factor could be demand growing
stronger in April, after producer feedback
pointed to it stepping up consistently
over first quarter of 2019.

Strong buying interest is also evident in the
UK market.

After the Easter break, European base oils
buyers and sellers will be closely monitoring
feedstock moves and the supply outlook for
cracks in the current market situation.

A key question many will be asking is what
happens if length grows even more sizeable
after the end of turnarounds.

Focus article by Vicky Ellis

Additional reporting by Sarah Trinder

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